Question
On 1 August 20X5, Graham Ltd. decided to discontinue the operations of its services division. The services division is not a separate corporation, but it
On 1 August 20X5, Graham Ltd. decided to discontinue the operations of its services division. The services division is not a separate corporation, but it is a major operating segment, financially and operationally. On 22 September 20X5, Graham closed a deal to sell the division to Frost Ltd. Frost will assume responsibility for the current liabilities (e.g., accounts payable and accrued liabilities) that pertain to the division. The facts pertaining to the sale are as follows:
Divisional assets, book values at 1 August 20X5 (cost of $475,000, less accumulated depreciation of $167,500) | $307,500 |
Division assets, estimated fair values at 1 August 20X5 | 275,000 |
Liabilities assumed by purchaser; fair value = book value | 135,000 |
Purchase price paid by Frost Ltd. | 235,000 |
Division revenue to 22 September 20X5 | 345,000 |
Division profit (before taxes) to 22 September 20X5 | 27,500 |
Commission fee paid to the business brokerage that facilitated the sale | 40,000 |
Graham Ltd. marginal income tax rate | 32% |
On 31 December 20X5, the after-tax net income, including the services division, was $300,000.
Required:
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Give the entries to record the (a) reclassification and (b) sale of the services division.
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Complete the 20X5 income statement, starting with income from continuing operations, after tax.
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Explain what other disclosures and/or reclassifications are necessary in the 20X4 comparative financial statements and notes
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